Multi-Family Housing: Safe as houses in Germany

Strong cashflow and demand keep German multi-family sector buoyant, reports Lauren Parr

German multi-family housing is as safe a bet now as it ever was, largely owing to the reliable nature of its cash flow, spread among hundreds or thousands of tenants in separate apartments within one complex.

Seen as a place to park equity and debt when the commercial real estate market was struggling, it is still an attractive play with today’s low interest rates and Germany’s stable economy. A housing shortage means demand is strong and the sector has the strongest price growth (6.9% in Q3) of all German real estate, according to the German Pfandbrief Bank association.

JLL says residential deal volumes should hit a record €30bn in 2015, driven by pre-summer mergers, such as listed residential company Deutsche Annington’s (DAIG) takeover of Gagfah, to formVonovia.

But the financing of multi-family investments has changed. CMBS was more important in the last cycle, with funding terms on senior, unsecured debt now more appealing. This shift was reflected in the refinancing of the first German post-crisis multi-family housing deal (Florentia) in September 2014, after DAIG took over sponsor Vitus, when CMBS was replaced with senior, unsecured debt.

Pricing is attractive, with coupons below 2% for up to 10-year senior, unsecured bonds with an investment-grade rating.

Gatfield: "German bank lending has bounced back in the past few years and multi-family is a bread and butter product"
Gatfield: “German bank lending has bounced back in the past few years and multi-family is a bread and butter product”

“If you can place an unsecured bond in the market and get good execution, some sponsors will push that door rather than having to ring fence collateral,” says Euan Gatfield, an MD in Fitch Ratings’ structured finance group.

Bond issuance is also easier for sponsors to manage. Reporting requirements are akin to those of listed companies for shareholders, whereas CMBS requires the inclusion of information that servicers might require, for example. Paying back parts of bonds is also simpler than CMBS loan repayment.

As investor sentiment and bank conditions have improved, sponsors have diversified funding sources to avoid a repeat build up of debt maturities at the same time. “German bank lending bounced back in the past few years and multi-family is a bread and butter product, particularly in the context of a general move to repatriate capital back into their home market,” says Gatfield.

As a defensive asset class that is less volatile than offices or retail, its allows banks to stabilise portfolios through conservative lending, taking lower margins for lower risk. Big commitments are no longer an issue and a tolerance for loan-to-value ratios in some cases up to 70%s has become the norm.

Pfandbrief banks have provided a big slice of multi-family housing funding, especially for €50m-€100m deals and sponsors less able to afford the external rating required to issue bonds. In competition with each other as well as the capital markets, margins have been known to fall below 100bps.

With liquidity from a range of outlets, sponsors are in a strong position. Investor LEG plans to finance its €600m purchase of 13,800 homes fromVonovia with bank debt leveraged at a 50% LTV ratio.

DREF’s student bond makes the grade again

German student housing developer Deutsche Real Estate Funds’ (DREF) increase of a bond issued earlier this year shows how institutional investors can access one residential area via debt rather than equity investment.

DREF upped the volume of the Deutscher Studenten Wohn Bond by €33m, to €77m, as part of a private placement at a 4.67% coupon. It is thought to be the first bond secured on German student housing and was taken up by German insurers including Versicherung-skammer Bayern and Barmenia Versiche- rungen at the initial and secondary stage.

DREF will use the proceeds to buy and refurbish three assets in Bochum, Essen and Kiel; the bond portfolio previously consisted of five assets in Berlin, Bremen, Kiel and Stuttgart.

“Our ability to mix a portfolio of new and existing properties needing rebranding and refurbishing gives investors a return above normal residential,” says Felix Bauer, Deutsche Real Estate Funds’ chief executive.

“Lots of pension funds were interested because, in terms of direct investment in student housing, they can’t get coverage in Germany. There is not much property around; most assets are older and need refurbishment yet they don’t have the resources.”

DREF is in talks over a joint venture with a large institution that will inject equity alongside a debt element into assets it will refurbish and own, once the investor’s return is delivered.

Additional acquisitions are likely to be financed in February or March next year with a substantially bigger, lower-yielding new bond issue secured against more existing assets.